| dc.description.abstract | The gearing level of firms is influenced by diverse factors. However the factors vary
amongst firms and industries. Different researchers, for example Kamere (1987) and
Omondi (1996) obtained differing conclusions on the important determinants of gearing
level of firms.
This study had the objective of determining the gearing level of companies quoted at the
Nairobi Stock Exchange as well as establishing whether there is a correlation between
gearing levels and company size of firms quoted at the Nairobi Stock Exchange. The
factors used to measure size of firms for the study period were market capitalization, net
assets and turnover.
Firms were ranked in pecking order based on their market capitalization and classified
into three groups of large firms, medium firms and small firms and their respective
aggregate gearing computed. The results of company size and gearing were plotted on
graph and also regressed for the entire period. This was also done at industry level. A
similar process was applied to all the firms using net assets and turnover as measures of
size.
The study found out that size, as measured by net assets is positively correlated to gearing
at both market and industry cIassification of firms into large, medium and small with coefficient
of determination being at 30%, 40% and 30%; and 22%, 55% and 11%
respectively. The second finding was that size, as measured by turnover is positively
correlated with gearing at market classification of assets into large, medium and small,
However, at industrial classification, the correlation is insignificant. Lastly, size, as
measured by market capitalization is positively, but insignificantly correlated to gearing
levels both at market and industry classification.
The graphical analysis produced mixed results and is tabulated elsewhere in this text. It is
also important to consider that the period under study had two interest rate regimes. The
period up to 2002 had high interest rates while the period after 2002 had low interest
rates. The graphical analysis depict that after stabilization of the interest rates in the year
2003, large companies recorded higher gearing at market classification irrespective of the
determinant of size.
All in all, the results from the various tests indicate that there are disparities in the
correlation between gearing level and size of firms. Possible explanations for this
includes the different interest rates regimes and small number of firms under study, which
is dictated by the number of companies listed at the Nairobi Stock Exchange. | en |
